There were no dramatic tactical shifts during after recent gains, they represent a likely source
the year, with surplus liquidity being invested of excess returns over time. Volatility in equity
in line with the asset allocation that prevailed at markets remains but so does their reasonable
the end of 2012. We have not dropped our guard valuation and attraction relative to other assets.
in matters of credit and the quality of our bond Given the above, our sights for the investment
portfolios remains high with over 90% of return in 2013 are set fairly low.
securities rated single A or better. Sovereign
bonds whose price depends largely on the In summary, the investment objective is to
prospect of support from the ECB were absent maximise investment returns within an overall
from our portfolio throughout the year. risk appetite and giving due regard to prevailing
Conservative levels of cash were maintained for financial, economic and market conditions.
the payment of claims and general corporate The overriding concern is not to lose money
purposes, with further liquidity being available in any 12-month period. Balancing these desires
from lines of credit which remained available and is becoming increasingly challenging in the
undrawn for cash purposes throughout the year. current environment as the chances of losing
Cash continues to be invested with a focus on money, given even a modest appetite for risk, are
safety rather than yield. increasing. The portfolio therefore is constructed
principally bearing in mind the need to pay claims
Whilst there are some grounds, looking ahead, and to provide capital for underwriting in all
to believe that economic activity is set to improve market conditions rather than to produce more
and the risks of a financial mishap are reduced, yield from artificially overpriced assets. In order
we still think that, on balance, it is a time for to allow some measured risk to be taken within
caution. The effects of financial repression have the portfolio the Board has, in recent years, set
meant that the yields of the bond portfolios have aside capital against the possibility of a negative
declined over the year and there is little scope result from the investment portfolio in any one
for further capital gain. Stretching for yield is year and this continues to be the case for 2013.
an option but there is not much to be gained from This gives us the ability to withstand volatility in
taking duration risk and much to be lost when markets but also the capacity to take advantage
interest rates rise. On credit, we are wary of of any opportunities that may be thrown up by
straying back into below investment grade market dislocations.
securities at levels which may look relatively
attractive in the short-term, but have limited
upside and will perform more like equities when
the tide turns. We are however prepared to take
a modest amount of selective risk in order to
avoid having a portfolio that is condemned to
producing little by way of return. This is currently
concentrated in the equity allocation where, even
High quality and well diversified portfolio Asset allocation
Investment portfolio: £3,055.8m
22.0% Cash
6.2% Risk assets
71.8% Bonds
Group investments Hiscox Ltd Report and Accounts 2012 21